Fed boss: Threat from deficits 'real and growing'

Ben Bernanke talks with students from Rhode Island colleges in Providence on Monday afternoon. The Federal Reserve chairman told them that additional purchases of bonds by the Fed could benefit the economy.

PROVIDENCE, R.I. — The economy could be hurt if Congress and the White House fail to come up with a plan to curb the nation's huge budget deficits in the coming years, Federal Reserve Chairman Ben Bernanke warned Monday.

He reiterated his belief that the government shouldn't raise taxes or slash spending now because the economic recovery is still too fragile.

But failing to bring the deficits under control could endanger the economy later on, he said. Exploding budget deficits can lead to higher interest rates for people buying homes and cars, and for businesses buying equipment or expanding operations. That could crimp Americans' spending and slow economic growth.

"The threat to our economy is real and growing," he said. "The sooner a plan is established, the longer affected individuals will have to prepare for the necessary changes."

The federal government is on track to produce its second-highest deficit ever — $1.3 trillion — for the budget year that ended Sept. 30. That would be slightly below last year's record $1.4 trillion.

Bernanke steered clear of making recommendations on the best way to reduce the deficits, saying those tough decisions are best left to the nation's elected officials.

Rapidly rising health care costs and the aging of the U.S. population are among the major forces putting pressure on the deficits in the years ahead, Bernanke said.

"We should not underestimate these fiscal challenges; failing to respond to them would endanger our economic future," he told the annual meeting of the Rhode Island Public Expenditure Council.

Earlier Monday, Bernanke told a group of college students in a town hall meeting that additional purchases of bonds by the Fed, an action the central bank will consider at its next policy meeting Nov. 2-3, could benefit the economy: "I do think that additional purchases — although we don't have precise numbers for how big the effects are — I think they have the ability to ease financial conditions.'' Several of Bernanke's Fed colleagues have shown an inclination toward such steps in recent days.